On July 25, 2017, the SEC issued an investigative report to advise those who have used or may consider using a virtual organization or capital raising entity that uses distributed ledger or blockchain technology to facilitate capital raising that these activities are subject to U.S. federal securities laws. The SEC also released an investor bulletin to educate and caution potential investors about this new and growing type of capital raising.

Although the SEC determined not to pursue an enforcement action in the instant case, the report concluded that the tokens at issue in the investigation were securities and that, therefore, the offering and sale of the tokens was subject to U.S. federal securities laws. This report confirms that the SEC will look to the facts and circumstances of transactions to determine whether they constitute offerings of securities subject to U.S. federal securities laws. As such, it has broad implications for market participants that assumed sales of digital assets by “virtual” organizations (such as “Initial Coin Offerings” or “Token Sales”) were outside the scope of these laws.